Implementing a new “Cadillac plan” tax on high-cost employer health coverage could lead to “mind-bending tax administration issues,” according to Mark Holloway.
Holloway, a benefits compliance law specialist at Lockton Companies, makes that prediction in an analysis of a new Internal Revenue Service (IRS) Cadillac plan request for information, given in the IRS Notice 2015-52.
In the notice, IRS officials ask for ideas about how they should implement Internal Revenue Code (IRC) Section 4980I, the section of the tax law that gives the Cadillac plan tax rules.
Because a health insurer administering the tax cannot deduct the excise tax amount from its own taxable income, the full amount an insurer will expect to get from an employer for paying the tax may be about 60 percent bigger than the tax payment itself, Holloway warns in the analysis.
“Do you have a headache yet?” Holloway asks. “I bet the IRS does, as it tries to solicit comments on the best way to structure and pay the tax.”
Drafters of the Patient Protection and Affordable Care Act of 2010 (PPACA) added the excise tax, in an effort to raise revenue, encourage employers to hold down health care costs, and reduce the share of federal health insurance tax breaks going to high-income workers with rich health benefits.
The provision calls for the IRS to have “covered providers” pay a 40 percent excise tax on the “excess benefits” in high-cost plans for the taxable years starting after Dec. 31, 2017. In the first year, the tax is set to apply to employer benefits packages with a cost over $10,000 for an individual and over $27,500 for a family.
Holloway notes that the total value of the 2018 health benefits package for Alan, a hypothetical employee, could include, for example, fully insured major medical insurance with a value of $10,000, a $2,000 contribution to a flexible spending arrangement (FSA) and a $700 self-insured health reimbursement arrangement (HRA) benefit.